Human Rights Impact - John T Newth FCA, FTII, FIIT, ATT summarises a recent a VAT tribunal decision which may have far-reaching consequences.

Human Rights Impact
John T Newth FCA, FTII, FIIT, ATT summarises a recent a VAT tribunal decision which may have far-reaching consequences.
The Human Rights legislation has been fully in operation since October 2000, and the tax profession has been divided as to the impact it will have on taxpayers, their rights, appeals and collection of duties. The London VAT Tribunal did in fact plunge head first into human rights law on 2 October 2000 and its decision is reported separately by Allison Plager on page 381. Matters have now moved on with the publication of a decision in another case on 5 December 2000 heard by Stephen Oliver QC.
This decision deals only with the preliminary issue, but affects many other appeals, some of which will be heard at an early date. Other taxpayers who have already settled civil evasion penalties may be able to appeal retrospectively.
The sole issue before the tribunal was whether the imposition of civil evasion penalties on the three appellants gave rise to a 'criminal charge' within Article 6.1 of the European Convention of Human Rights.
The three appeals
Each of the appellants appealed against (among other things) the imposition of a civil evasion penalty as follows:
Mr Han and Mr Yau, who ran a Chinese restaurant, were assessed for a penalty under section 60, VAT Act 1994 of £67,095, being 90 per cent of the tax due to reflect their 'partial assistance' in a civil penalty situation.
Messrs Martins & Martins were similarly assessed for a section 60 penalty of £77,576, again being 90 per cent of the civil penalty that could be assessed, again reflecting partial assistance.
Mr Morris was assessed a penalty for civil evasion of excise duty under section 8, Finance Act 1994. The penalty was 50 per cent of the tax due, namely £7,652, reflecting a degree of disclosure and co-operation by Mr Morris.
The fact that the penalties were imposed before the Human Rights Act 1998 came into operation was not an issue between the parties.
The law
Article 6.1 of The European Convention of Human Rights provides, so far as is material: 'In the determination of his civil rights and obligations or of any criminal charge against him, everyone is entitled to a fair and public hearing'.
Section 3(1), Human Rights Act 1998 imposes as an interpretive obligation 'so far as it is possible to do so, primary legislation and subordinate legislation must be read and given effect in a way which is compatible with the Convention rights'.
Section 2 requires the tribunal to take into account 'the Strasbourg "case law" when determining a question which has arisen in connection with a Convention right'. As a public authority it is unlawful for a tribunal such as a VAT tax tribunal to act incompatibly with a Convention right.
Tribunal considerations
Mr Oliver considered the penalty provisions under United Kingdom VAT and excise law.
Customs had to satisfy the tribunal that the taxpayer had committed an act or omitted to take an action for the purposes of evading VAT and that the conduct involved dishonesty (whether or not it is such as to give rise to a criminal liability). Evasion of tax is contrasted with legal avoidance and consequently Customs had to prove that the act or omission was unlawful. Additionally they had to prove that the conduct of the person in question 'involved dishonesty'. Dishonesty in this context has the same meaning as its sense when used as an ingredient of a criminal offence.
The ingredients of the civil offence in section 60(1), VAT Act 1994 and the criminal offence in section 72 of the same Act are not significantly different. However, a key difference lies in the standards of proof. To prove a civil offence Customs and Excise have to establish their case on the balance of probabilities (see First Indian Cavalry Club v Commissioners of Customs and Excise [1998] STC 293). The 'beyond reasonable doubt' criminal standard of proof applies to the offence under section 72.
Section 60 is the only civil penalty provision in the VAT compliance code that requires proof of dishonesty, the maximum penalty being 'equal to an amount of the VAT evaded'. Customs or the tribunal on appeal may mitigate the penalties to such amount as they think proper.
This contrasts with section 63 where a penalty for 'misdeclaration' is likely to be 15 per cent of the VAT lost. Section 64 imposes penalties for repeated misdeclarations and in both instances dishonesty does not have to be proved and the taxpayer may establish a defence based on reasonable excuse.
A typical instance of a section 60 case is Georgiou (trading as Mario's Chippery) v Commissioners of Customs and Excise [1996] STC 463. The civil penalty code was introduced by Finance Act 1985 following the recommendations of the Keith Report. The report recommended that the civil penalties for dishonesty should be imposed from a maximum of 100 per cent down to 50 per cent, depending on co-operation. Mr Oliver observed that the penalties imposed by section 60, VAT Act 1994 and section 8, Finance Act 1994 were there to deter and punish and their function was not to compensate Customs and Excise. The tax or duty assessed and any interest compensated the department for the lost revenue.
The Human Rights legislation
The chairman stressed that his decision was only concerned with the preliminary issue as to whether the penalty assessments raised on the appellants were criminal charges within Article 6 of the European Convention of Human Rights. He drew attention to Ozturk v Germany [1984] EHRR 409 which was the only case as far as he was aware in which the Strasbourg Court had considered penalties imposed as part of a 'decriminalised' legislative scheme. There the Court held that a conviction for careless driving amounted to a 'criminal charge' within Article 6.1, notwithstanding that it was classified as a regulatory offence.
Mr Oliver went on to consider the now well-known case of Bendenoun v France [Application No 12547/86]. This concerned the unlawful importation of objets d'art and failure to disclose those sales in tax computations. In France, proceedings for financial penalties take place in the administrative courts and the defendant complained that his right to a fair trial had been violated both in the administrative proceedings and later criminal proceedings.
The penalties in the current case are part of the civil code and there is no possibility of the appellants receiving a criminal record or loss of liberty. However, Mr Oliver stressed that they are penal and not compensatory. Applying the criteria of Engel v Netherlands [1979-80] 1 EHRRR:
the penalties in the three cases could be classed as either civil or criminal;
the nature of the offences pointed, according to Mr Oliver, towards the penalties ranking as criminal charges despite their place in the civil penalty code. The offence in each case involved dishonesty;
the third criterion was the severity of the penalty and this was examined by the Court in two cases AP, MP and TP v Switzerland and EL, RL and JOL v Switzerland [Application No 20919/92]. In both those cases the Strasbourg Court concluded that they concerned the determination of criminal charges, in cases which involved fines for tax evasion which could have been as much as 400 per cent of the tax evaded, although in both cases the fines were substantially mitigated. In the present cases the penalties were sufficiently burdensome to fall on the criminal side of the line, applying the third Engel criterion.
The tribunal chairman then came to his conclusions. In his view, the penalties imposed were properly to be classified as 'criminal charges' for the purpose of Article 6.1. This conclusion was in line with the recent decision of Georgiou v United Kingdom [Application No 40042/98].
That decision was not binding on the tribunal but Mr Oliver felt that he was nonetheless required by section 2, Human Rights Act 1998 to take it into account, and did so.
Accordingly the preliminary issues were determined in favour of the three appellants. Costs were granted, and the chairman commented that the issue affects a large number of other appellants whose appeals are 'stacking up'.
Commentary
There are at least another fifteen appeals selected as lead cases by the VAT tribunal due to be heard, and these have been adjourned until January 2001. It is not just Article 6 of the Human Rights Act 1998 which is an issue. Other appeals include the refusal to restore substantial amounts of seized excise goods in which Article 1 of the First Protocol, the right to the peaceful enjoyment of possessions, will be argued. There is also a demand for security, which will raise wider questions of Community Law.
Apparently Customs and Excise have provided some funding in respect of two of the early preliminary hearings but have refused to provide any further funding.
This particular case was merely a preliminary hearing and final judgment and reasonings are still awaited from the VAT tribunal. The case is almost certain to be appealed by Customs, but the results could well cause major changes in the way Customs go about their VAT investigations.
Another aspect is that it is possible that some evidence which is currently gathered by Customs (for example surveillance) could be inadmissible. The department normally tells people that a full and frank disclosure would make them more amenable and lead to a smaller penalty. That is an inducement and therefore contrary to the Human Rights Convention and its rules about self incrimination.
Many VAT appeals are entered into without professional help for the taxpayer during the hearings. The decision that a VAT investigation is a quasi criminal procedure means that appellants should logically be allowed legal aid.
Some commentators believe that all those who have paid penalties as a result of investigations under the old procedure should put in notices of appeal. Normally those appeals have to be lodged within 30 days but the tribunal has the discretion to allow them out of time.
The tribunal may well decide that such a broad change of the VAT rules could not have been foreseen by other taxpayers and therefore entitle them to be heard. In any case, if a penalty hearing is regarded as a criminal procedure, the thirty day limitation may well not apply. All of this leads to the urgent necessity for all taxpayers and general practitioners who have been involved in VAT investigations dealing with penalties to obtain expert advice at the earliest opportunity.
Customs and Excise have pointed out that there are great advantages for taxpayers from civil procedure rather than criminal. The taxpayer does not receive a criminal record and cannot go to jail if he fails to pay – although his company could be wound up.
Assuming that the preliminary finding of the tribunal in the current case is upheld, the consequence will be that the taxpayer under investigation will have to be cautioned properly in accordance with the Police and Criminal Evidence Act 1984 and informed about his or her rights. They will also have to be told that they can have professional representation under legal aid, if they cannot afford professional fees personally.
Civil or criminal? – by Allison Plager
Only one day after the Human Rights Act became effective on 2 October 2000, a VAT tribunal under the chairmanship of Dr John Avery-Jones initiated a debate on the application of the new Act to VAT legislation.
The date for the hearing was fixed following a preliminary hearing in August which had dismissed the appellant's application for postponement. The appellant was not present at the hearing, although he sent representatives to take notes of the proceedings. The Human Rights Act was mentioned, but Customs argued that that Article 6 of the European Convention on Human Rights did not provide any right for the appellant to require a hearing date to be adjourned for his convenience. He knew when the hearing would take place, and so had the right to appear even if he chose not to do so. The tribunal agreed with Customs.
The tribunal first asked Customs it they accepted that the case was a criminal one for the purposes of Article 6 of the Human Rights Convention, as this might affect the admissibility of some of the evidence. Customs submitted that the case was a civil one, and that all the evidence was admissible. They did not want to argue to point before the tribunal. The tribunal was not particularly pleased with Customs' attitude, and said it would therefore have to decide the human rights aspect.
The tribunal referred to case law and an article, 'Taxation and the European Convention on Human Rights' by Philip Baker [2000] British Tax Review at page 211. It concluded that various factors including the level of penalty and its description in VAT law led it to decide that the case was a criminal one.
The tribunal then considered whether the Human Rights Act was retrospective and would cover the instant case. Section 22(4) of the Act says that reliance cannot be placed on the convention for acts which took place before the Act came into force in the United Kingdom, unless the proceedings are brought by a public authority. Despite the appeal having been brought by the taxpayer, this was done because of actions taken by a public authority, and therefore the taxpayer could rely on his rights under the convention.
Thirdly, Article 6(2) of the Convention presumes that everyone charged with a criminal offence is innocent until proved guilty. This right has been upheld as including the rights to silence and not to incriminate oneself. This right had been infringed, as Customs had twice interviewed the client and referred to Notice 730 'Civil evasion penalty investigations' which contains an inducement to the appellant to co-operate. The tribunal therefore decided that evidence from the interviews should be excluded.
There was one other matter. The appellant's solicitors sent in a witness statement signed by the appellant which Customs had objected to under rule 21(4) of the VAT Tribunals Rules 1986: 'the witness statement shall not be read or admitted in evidence at such hearing'. At the hearing, counsel for Customs invited the tribunal to read the statement, but that it should prefer oral evidence given at the hearing if it conflicted with the statement. The tribunal agreed that the statement should be admitted citing the appellant's right to a fair trial in Article 6.
As to the subject of the appeal, alleged evasion, the tribunal decided that the appellant knew that his actions would be regarded as dishonest, and said that his conduct in relation to all the VAT evaded confirmed this. Thus the appeal was dismissed.
However, the actual decision is, for the public at large, almost irrelevant; the exciting part of the hearing related to the human rights aspect. The tribunal embraced the Human Rights Act enthusiastically, showing that it was very much up to speed on the subject. Customs should clearly consider reviewing their investigation procedures. They are likely otherwise to find that the Human Rights Act is going to cause them some problems, if cases which were defined as civil under domestic VAT law will be redefined as criminal under the new Act.
(J L Murrell (16878).)